The Oil Price Outlook Through 2004 Graham Loveland: Principal Global Energy Group 27 January 2004

Outline of Presentation Brief summary of the message The current market & why have we been wrong? Economic outlook Oil demand Non-OPEC production Inventories OPEC production, options and politics Price scenarios Factors to watch through 2004 5/5/2019

Brief Summary of the Message Price forecasts low because demand high GI still expects a price fall in Q2, because… The reduced call on OPEC crude is too great for OPEC to be able to agree suitable cuts But the base WTI forecast is now higher, $26/bbl Clean products markets are tight. Gasoline prices likely to be high this year Major uncertainties: demand, stocks, OPEC cohesion 5/5/2019

Current Unusual Market Features Very high crude prices whilst OPEC openly frets about a price fall and analysts expect one More worries about US gasoline stocks than distillate stocks US spec changes  complex gasoline market Iraq production rising but security? bottlenecks? Record high European product price spreads to crude for the time of year Uncertainty about Russian export intentions Uncertainty about Chinese import intentions 5/5/2019

Undershooting the Price 5/5/2019

Most Analysts Expect a Price Fall (Or Did in Late December) Source: Argus Global Markets 22.12.03 5/5/2019

Why Did We Get It Wrong? Economic recovery stronger than expected Total demand stronger than anticipated January estimate of Q4 1.2 mb/d higher than July OECD “bottom up” stocks have not risen as expected Reflecting stronger demand now apparent So US crude stocks have remained low, due to US refinery runs have been very high… Chinese imports have surged and pre-empted supplies Prices in backwardation – little incentive to build stocks Continuing SPR fill (average 160 kb/d in Q4, 275 kb/d in Dec) US gasoline stocks have caused concern, due to Very strong US autumn gasoline demand Refiners maximising distillates earlier in 2003 5/5/2019

OPEC’s Saviour in 2003: Demand 5/5/2019

But 2004 Call Not Rising So Much 5/5/2019

The Price-Stock Relationship (1) 5/5/2019

The Price-Stock Relationship (2) 5/5/2019

High U.S. Crude and Gasoline Use… 5/5/2019

Result in Low Stocks 5/5/2019

GDP Growth Rates 5/5/2019

Global Demand Growth 5/5/2019

Chinese Demand Growth Source: IEA 5/5/2019

Reasons for Chinese Demand Growth Rapid growth in car ownership plus road building Recovery in flying after SARS Warm summer 2003 increased AC demand Strong industrial demand due to export-led growth Construction boom increasing demand for energy intensive building products (steel, cement etc.) Rapid growth in electricity consumption which remains heavily reliant on oil Consumer stock building in anticipation of a price increase – how large? 5/5/2019

What Is Chinese Demand, Really? No demand statistics are published Thus “demand” is actually “apparent demand” Derived from reported production plus net imports But trade statistics are notoriously inaccurate “Apparent demand” includes stock changes All that is certain is that demand is rising rapidly! 5/5/2019

Non-OPEC Is Increasing Non-OPEC year on year growth mb/d 5/5/2019

Iraq Is Increasing 5/5/2019

OPEC Capacity Is Increasing Saudi Arabia Increases may just offset losses UAE But will probably support cuts Iraq Infrastructure an issue but rising Iran Wants to keep ahead of Iraq Qatar Traditionally a “quota cheat” Libya Will probably “cheat” Algeria Wants bigger quota. A “quota cheat” Nigeria Wants bigger quota. A “quota cheat” Venezuela Need to make up for 2003 losses 5/5/2019

But the Call on OPEC Is Falling… 5/5/2019

The Outlook in 2004 Rising non-OPEC production will cover rising demand OPEC usable spare capacity has recently been less than 1 mb/d OPEC capacity is rising, possibly by 2-3 mb/d Members will want to utilise new capacity if possible But the annual call on OPEC is falling by around 0.7 mb/d and… The cut needed for Q2 could be close to 4 mb/d Traditional quota non-compliers are unlikely to agree to (or make) large cuts Hence Saudi Arabia (with Kuwait and UAE?) may have to make larger than proportionate cuts We do not expect OPEC to be able to make this scale of cut But how much does SA want to support prices? 5/5/2019

OPEC’s Price Targets 5/5/2019

Prices Generally Miss Targets Even the $18/bbl target of the late 1980s was only moderately successful Prices virtually never reached the $21/bbl target Prices within the $22-28/bbl price band are due to special factors: Low non-OPEC investment following 1998/99 collapse Diminishing spare capacity in OPEC due to lack of investment and mothballing of spare capacity Production losses in Venezuela, Nigeria, Iraq 5/5/2019

Stocks (Days Cover) and Price 5/5/2019

Price Scenarios for 2004 5/5/2019

Factors to watch in 2004 (1) Demand Supply Stocks Impact of economic recovery on demand Chinese demand – will it slow down/be slowed by Gov’t action? Supply Russia/Caspian/W. Africa– how fast will they rise? Iraq– will it hit an infrastructure bottleneck? Nigeria – how much and when? Stocks US crude stocks – how low is low? Industry view (unconcerned) vs. market view (concerned) Gasoline – can stocks build in time for the driving season? Where is all the oil going?? 5/5/2019

Factors to Watch in 2004 (2) OPEC Outcome of 4 February meeting? Price versus market share? (logic vs. emotion) Dollar versus Euro for valuing revenue? The future of the $22-28/bbl price band? Reactions to a falling price? Bottlenecks in rise of Iraq exports? How to reintegrate Iraq? How to reallocate quotas? How to handle likely flagrant over-production from possibly several members? How important is price support to SA if it means a large cut? 5/5/2019